22.5 Rossco is considering the purchase of a new computer with the following estimated costs:
initial systems design, $54,000; hardware, $74,000; software, $35,000, one-time initial training,
$11,000; system installation, $20,000; and file conversion, $12,000. A net reduction of three
employees is expected, with average yearly salaries of $40,000. The system will decrease
average yearly inventory by $150,000. Annual operating costs will be $30,000 per year.
The expected life of the machine is four years, with an estimated salvage value of zero. The
effective tax rate is 40%. All computer purchase costs will be depreciated using the straight-line
method over its four-year life. Rossco can invest money made available from the reduction in
inventory at its cost of capital of 11%. All cash flows, except for the initial investment and start-up
costs, are at the end of the year. Assume 365 days in a year.
Required
Use a spreadsheet to perform a feasibility analysis to determine whether Rossco should
purchase the computer. Compute the following as part of the analysis: initial investment, after-tax
cash flows for years 1 through 4, payback period, net present value, and internal rate of return.
